KBC Takes Stand on Payday Lending

The Kentucky Baptist Convention, meeting in its annual session Nov. 15 at Florence Baptist Church at Mt. Zion, passed a resolution calling for the capping of the interest rate on “payday” type loans at 36 percent. The current loans, which can end up having triple digit interest rates, tend to target the poor and can entrap them in an endless cycle of growing debt.

The resolution was submitted by Dr. Joseph L. Owens, pastor of Shiloh Baptist Church, Lexington.

Here’s the text of the resolution:

Resolution on Payday Lending

Whereas the Bible has spoken clearly about loaning money at interest (Exodus 22:25-28; Leviticus 25:35-37; Deuteronomy 23:19; Psalm 15:5)

Whereas the Christian faith has historically opposed and deemed usurious loans at exorbitant rates of interest, especially to those who are poor

Whereas certain lending products exist in Kentucky that impose usurious rates of interest including what are commonly known as payday loans[i]

Whereas these products are predatory in nature, designed to entrap households in debt through a combination of high fees and short repayment periods resulting in interest rates as high as 391% APR (annual percentage rate)

Whereas a typical Kentucky payday borrower is indebted for 160 days a year, and pays $529 in fees alone for $317 of credit[ii]

Whereas these lenders primarily serve people who are poor or in financial distress and often perpetuate and increase their financial distress[iii] rather than offer an avenue out of financial distress or foundation for fiscal stewardship

Whereas we recognize the sinful and fallen nature of human beings and the just role of government to protect people from predatory activity (Romans 13:3)

Whereas many states, including Kentucky, historically had usury provisions and a small loan cap of 36% APR that limited lending abuse[iv]

Whereas seventeen states and the District of Columbia protect their borders from predatory lending by enforcing two-digit interest rate caps and federal law establishes a maximum rate of 36% APR for small loans to military personnel[v]

Be it resolved that the Kentucky Baptist Convention encourages state and local units of government to restrain exorbitant interest by establishing a cap of thirty-six (36) percent for all small loans and any other protections necessary to protect individuals from lending abuse.

[i]  As of 2010, there were 615 licensed payday loan stories operating in 95 counties across the Com­monwealth of Kentucky.  (KY Dep’t of Financial Institutions, “Report on Kentucky Payday Lending Activity for April 30, 2010 to April 30, 2011).”  According to state law, licensees may charge $15 per $100 borrowed, with a minimum loan term of 14 days.  This results in an annual percentage rate (APR) of 391% for a typical payday loan. KRS 286.09, et seq.

[ii] In 2010, Kentucky implemented the current law which attempted to curb and monitor payday loan use, but still allowed rates as high 391% APR.  The provisions of the new law are monitored and enforced through a real-time database.   The Kentucky Department of Financial Institution released a report summarizing data from the first full year for which the database was operating (Apr 30, 2010 – April 30, 2011).  The numbers here come from that report of payday loan usage in Kentucky.  The report also states that a typical payday borrower has 10 payday transactions a year.  See KY Dep’t of Financial Institutions, “Report on Kentucky Payday Lending Activity for April 30, 2010 to April 30, 2011).”

[iii] A number of academic studies of payday lending have identified its negative effects on households. 2007 and 2008 studies found that households with greater access to payday loans had increased difficulty paying bills and were more likely to overdraw their bank account, in some cases bringing about closure of their bank account.  Brian T. Melzer (PhD Candidate, Economics, U. of Chicago Business School), The Real Costs of Credit Access: Evidence from the Payday Lending Market (Nov. 15, 2007); Dennis Campbell, Asis Martinez Jerez, and Peter Tufano (Harvard Business School), Bouncing Out of the Banking System: An Empirical Analysis of Involuntary Bank Account Closures (June 6, 2008).

A study comparing Texas borrowers with loan applicants who were denied payday loans helps determine whether payday borrowing increases or decreases the likelihood of bankruptcy. Researchers found that those approved for a payday loan were 88 percent more likely to file for Chapter 13 bankruptcy within two years than the rest of the Texas population. They were also 14 percent more likely to file for Chapter 13 bankruptcy than their peers who had applied—and then been denied—a payday loan. While these households’ total debt when filing for bankruptcy is made up of more than just their payday loan obligations, about 11 percent of their total annual interest burden is for payday loan fees and therefore could have been a decisive factor in the decision to file for bankruptcy.

Do Payday Loans Cause Bankruptcy?; Paige Marta Skiba (Vanderbilt) and Jeremy Tobacman (U. Pennsylvania) (October 10, 2008.)

[iv] Kentucky passed the Small Loan Law in 1934 and brought an end to legalized loan sharking. Borrowers enjoyed protection from most predatory small loan products from 1934 until payday lending re-emerged in Kentucky in 1992. The payday lending industry operated in the Commonwealth without the benefit of enabling legislation until 1998. In 1998 the General Assembly legalized payday lending at 400% interest rates.  See KY Coalition for Responsible Lending, “Debt Trap in the Commonwealth.” All other consumer finance lenders, such as car title lenders and traditional installment lenders, are subject to 36% APR cap in Kentucky.  Only payday lenders enjoy the carve-out from the state’s usury laws to charge 391%.

[v] Arizona, Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, Montana, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont, and West Virginia, as well as the District of Columbia prohibit the issuance of triple-digit interest rate payday loans, accounting for one-third of the U.S. population.  In 2006, President George W. Bush signed into law protections against the abuses causes by payday, car title, and refund anticipation loans to active soldiers and their families.  Among these provisions, known as the Talent-Nelson Amendment to the Military Lending Act, were a 36% rate cap and prohibiting the use of a check or car as collateral for the loan.

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